The Breakdown - 'Putin's Price Hike' vs. 'Bidenflation': The Blame Battle on Inflation Heats Up

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, April 13th, and today we are talking about the narrative battle around inflation, which last month hit 8.5% the highest number since 1980. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it wherever you listen to podcasts. Leave us five stars or leave a review, or if you want to get deeper into the conversation with some really sharp folks, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.le. That's LY slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX.

Starting point is 00:01:03 Also, if you haven't registered yet, I highly suggest you check out CoinDesks Consensus 2022. It's happening June 9th through June 12th, and this year is in Austin, Texas. What's cool about consensus is that this really hits all aspects of the crypto ecosystem, from blockchains to Web 3 to Metaverse, and is designed for everyone from newbies to investors to entrepreneurs, to developers, and more. They're going to be great guests, great audience, great events. And if you want to go, use the code breakdown to get 15% off your pass, and you can sign up at coin desk.com slash consensus 2022. Lastly, and I apologize for the long intro today, guys, but I want to say congrats to one of our sponsors and longtime supporters of the show, Nexo, who have in partnership

Starting point is 00:01:47 with MasterCard launched what they're calling a crypto-backed payment card in Europe. Basically, the idea here is that instead of a credit or debit card that actually converts and sells your crypto, this card uses crypto as collateral to back the credit line. This is obviously very cool for those who want to make their crypto work for them, but who don't want to have to sell it, especially given that in many places any sale, even to make a small purchase, is a taxable event. Anyways, congrats again to those guys and thanks for your support of the show. But let's talk inflation now. And obviously each month, early in the month, we get a chance to review the official inflation stats from the month before. Given how dominant inflation has been in the macro narrative, this has become one of the

Starting point is 00:02:28 of the most important economic discussion points each and every month, and this one was juiced up in a way that even those in the past couple haven't. Part of that is that people were expecting inflation to be really, really high. Credit Suisse expected 8.6%, Morgan Stanley, 8.6%, City, Goldman and Ing, again, all 8.6%. Barclays, Numura, Unicredit, TD, T.D., Jeffries, all 8.4%. In fact, really, most of the major banks didn't have it below 8.2%. Another part of why the discussion hit a new level, however, was that the White House also seemed to feed into those expectations when on Monday night they said that they expected inflation to be, quote, extraordinarily elevated. Still, what really changed the discourse this time around was the fact that March was the first

Starting point is 00:03:13 full month where the impact of sanctions against Russia following their invasion of Ukraine would show up in the numbers. Now, I believe that this was always going to play a role in the discourse around these inflation numbers, but the Dems in D.C. really supercharged it with their decision to start using the term Putin's price hike to describe inflation. In fact, here's Jen Saki, the White House Press Secretary, introducing both the extraordinarily elevated expectation and the Putin's price hike language. So because of the actions we've taken to address the Putin price hike, we are in a better place than we were last month. But we expect March CPA headline inflation to be extraordinarily elevated due to Putin's price hike. And we expect a large difference between

Starting point is 00:03:59 core and headline inflation reflecting the global disruptions and energy and food markets. The reaction to this phrase was pretty strong pretty quickly. TXMC Trades wrote the White House naming inflation Putin's price hike is a bold and trepid lie, dusted with enough molecules of truth so as to prevent its non-existence. It is a specter and not near to reality, planted for use in a future agenda. Cameron Winklevoss from Gemini says the U.S. government takes responsibility for nothing. Inflation is now due to the Putin price hike despite record-breaking inflation numbers many months before the invasion. Luke Groman writes, Putin causing U.S. inflation was bad, but the really dastardly thing Putin did

Starting point is 00:04:39 was forcing the U.S. government into 28 years of disastrous foreign economic and trade policies that ran U.S. debt to GDP up to 130 percent and deficits to 10 percent of GDP, leaving the U.S. Treasury market vulnerable to high inflation prints. You gotta love Luke. Finally, markets and mayhem rights, it's completely disingenuous to refer to this inflationary pressure as the Putin price hike. I don't care which political party one may choose to align with. That's just a sloppy propaganda attempt that won't resonate well with anyone who has

Starting point is 00:05:07 more than a few functioning neurons. I think this analysis is actually worth pausing on. The problem with the term Putin's price hike isn't that the disruption of this war and sanctions aren't meaningfully impacting inflation. It's that the idea that the war is a problem. the only or even primary thing driving inflation right now is so obviously BS to everyone paying attention that it reads like the politicians think the public is stupid. Propaganda works when it seems reasonable, not when it hits you over the head with its disconnect from reality.

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Starting point is 00:07:23 For what it's worth, I also think that the Biden inflation narrative is also dumb. Ted Cruz tweeted, the White House is now expecting shocking inflation numbers. Here's the list of the Biden and men's ever-shifting denial of reality about inflation. It's not happening. It's transitory. It's a high-class problem. It's a good thing. It's Putin's fault. It's Biden inflation. This is clearly also political. It's denying any role that the Trump administration, which oversaw the initial round of COVID stimulus and Republicans who supported those efforts might have had as well. It's a term that when you hear it, you can pretty quickly and comfortably assess the political objective of the person using it. That said, not being willing

Starting point is 00:07:58 to call it Biden inflation doesn't mean that this administration should somehow be free from blame. There has been a long period after Trump and after the first wave of COVID where decisions they've made or not made have impacted inflation, and at this point it's clear for the worse. The messaging has been bungled from the beginning. The ironic thing about the transitory inflation label is that what they were really saying was a technical argument about the roots of inflation. They were talking about a supply demand mismatch as people came out of lockdowns. They were talking about supply chain disruptions as businesses that had been offline tried to come online. Those things have seemingly pretty clearly been significant factors in producing this inflation. But the language of transitory does three things.

Starting point is 00:08:40 One, doesn't actually explain those things that they were trying to say. Two, it gives an inherent sense of dismissing this as a problem just by nature of the word transitory. And three, it creates a sense of time limitation that could easily be disproven. This last part was especially silly to do, given how much was completely unknown about the context we were moving into. We'd never had a global pandemic with a host of mutations and waves in a modern, interconnected global economy. And we certainly had never dealt with shutting down the entire world economically at the same time. In a situation that literally no one has experience with, maybe choosing a language of certainty and time-boundedness wasn't the best idea. Indeed, ultimately, what the transitory

Starting point is 00:09:21 language amounted to was a bet. The Fed and the administration that parroted the line made a wager that inflation would resolve before calling it transitory made them look dumb and started extracting a political cost. They lost that bet, and every narrative shift since, from its greedy corporations taking advantage of this moment to extract more from you, to the latest Putin's price hike, have just been attempts to dig out from the original sin of calling inflation transitory in the first place. It makes me think even more about how damaging it is that the Fed's major tool isn't monetary policy, but media and self-fulfilling prophecy. Would the world be in a better spot now if the Fed had said, listen,

Starting point is 00:10:00 here are what we believe the root causes are of this inflation. Supply demand mismatches, exacerbated by supply chain disruption. Notably, this means that the inflation we're seeing isn't yet the pernicious spiral of higher wages that create higher prices, that create higher wages, etc. But we're watching. Given the nature of this inflation, it should be temporary. It should work itself out as supply chains resolve and people level out their demand.

Starting point is 00:10:25 The problem is we're in totally uncharted territory and we have no idea how long that will take. Given all that, we're in a tough spot. Keeping our foot on the gas of monetary support could make inflation worse if it takes longer to resolve than we think. At the same time, recovery from economic downturns is always worse for the poor. And by keeping up more support, we hope we can get more people in jobs faster than in past recoveries. Now, of course, I realize that this is super easy for me to say in retrospect, that politics, especially in our world, doesn't work like this. that it's equally likely that everyone would then be shouting at the Fed for admitting they didn't have any idea what they were doing,

Starting point is 00:11:00 and that for, even if they had that level of transparency in their public discourse, they still might have made the wrong decisions. But I don't know. I think having the humility to explain exactly what was going on and what they didn't know and why they were making the decisions they were, without relying on a buzzword like transitory might have led us to a different place. In any case, this is where we were on Monday night. So what actually happened with this inflation print?

Starting point is 00:11:24 Remember, February's gain had been 7.9% and economists were expecting between 8.2 and 8.6%. What we got was 8.5%. The highest year-over-year inflation jumped since 1981. Month-over-month was 1.2% the highest monthly jump since 2005. Gas drove half of that cost increase, but food was also up. The core CPI month-over-month was the only bright spot that anyone tried to hold up. Core CPI gets rid of food and energy, which are seen as more volatile, and increased 6.5% year over year, but only 0.3% month over month instead of the expected 0.5% month over month. Remember, a lot of the market's reaction to any given news is not based on the

Starting point is 00:12:05 raw numbers, but instead based on what the market expects. So the 0.3% instead of 0.5% was seen as a victory. The core number came in unexpectedly lower because of the biggest drop in used vehicle prices since 1969, as well as some amount of deceleration of growth in other categories. There was a lot of attempt to spin that one as a positive, although Nick Carter was not having it. He tweets, inflation is 8.5%. And some economists are celebrating that the second derivative of core prices, the rate of change of the rate of change, is negative. Prices didn't decline. They still went up. But the rate of increase in the specific subset of prices wasn't quite as rapid as the previous month. Did anything get cheaper? Heaven's no. Things are getting more expensive, just at a slower rate than before.

Starting point is 00:12:50 For a subset, feel better? Now, speaking of reactions, there was a lot of breaking apart of the full year-over-year list of price increases. Gas up 48%, electricity, 11.1%, meat, poultry fish, 13.8%. Milk, 13.3%. Eggs, 11.2%. Bread, 7.1%. Coffee 11.2%. Used cars, even with that decline, 35.3%. and so on and so forth. In terms of people feeling the pinch, wages continue to not be able to keep pace. Lisa Abramowitz from Bloomberg writes, average weekly earnings on an inflation-adjusted pace are declining by the most in data going back to 2006, highlighting how far wages are lagging behind consumer price increases. Many honed in on the housing cost measures as a particularly egregious departure from the reality of the situation that people actually face. Michael Burry of Big Short fame says CPI says housing cost rose 5% last 12 months.

Starting point is 00:13:47 Wrong. CPI would be 12% using real-world NAR housing data. Bureau of Labor Statistics has smoothed out housing numbers forever because home prices have been a problem forever. Wall Street's Silver and many others pointed to the difference between the CPI rent increase of around 5% and more market-based indexes like Zillow's rent index, which suggests that rents have increased 16.8% year over year. And then, of course, there are a lot of people who are just looking to what comes next. Market analyst David Tracy writes BlackRock's CIO on Yahoo Finance today. Rates would need to go to 3.5% before we worry about stock market valuations.

Starting point is 00:14:23 Inflation is good for stocks. Remarkable comments. Alan Levinson, the CIO at Overlay Capital Partners writes, The 60s and today are in completely different economic landscapes. 60s was a lightly indebted aspiring young country that hadn't tasted prosperity. Money supply was steady and velocity strong. Today, fat, old, lazy, complacent, heavily indebted money velocity is dormant. You will not have a demand-side shock where too much money is chasing too few goods.

Starting point is 00:14:48 This massive indebtedness will return us to secular deflation once the severe acute inflation is in the rearview mirror. Adam Taggart, the CEO of Wealtheon, says, I think today's March print is likely the peak in reported CPI. Do mostly two year-over-year comparisons get tougher in April. Rate hikes and quantitative tightening fed more serious than many think. Fast- slowing GDP. I think disinflation will be the theme for the rest of 2022 and likely deflation for 2023.

Starting point is 00:15:14 And then, of course, you're hearing a lot of the stagflation word. A piece in Bloomberg today, stagflation risk has investors sinking billions into hedges. Europe's seen facing a regime of high inflation and negative growth. Quote, it's the next big market call that could enrich traders across Wall Street. The raging global energy crisis and ever more hawkish central banks knock key economies into 1970-style stagflation. It's a long shot for now. It's a long shot for now. but anxiety is building among money managers that this market scenario, out of control inflation, just as growth slumps, will eventually come to pass, especially in Europe, end quote. Indeed, a Bank of America report just out also shows the highest stagflation expectations since

Starting point is 00:15:53 August of 2008. I think this is something we'll have to come back to. For now, I think the takeaway here is that no matter how much the Biden administration wants it to be the case, Russia has not displaced inflation as the key macroeconomic story, at least when it comes to markets. Indeed, if anything, the jockeying is to understand if and how Russia's war in the Ukraine is impacting what is really in the driver's seat, which is, of course, inflation. One thing to watch, I believe, in the coming weeks, is to see if we start to see the beginning of demand destruction, if we actually start to see people make big shifts in their consumer habits. To some extent that's already happening, but I wouldn't be surprised if we start to see a lot more focus on that from

Starting point is 00:16:34 media in the weeks to come. For now, I want to say thanks again to my sponsors, nexus.io, Arculus, and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2022, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain,

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The Breakdown - 'Putin's Price Hike' vs. 'Bidenflation': The Blame Battle on Inflation Heats Up

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